I’m currently in the due diligence phase with a small electrical company in Texas. The company has been in business for 30+ years and has steady (modest) cash flow. Rough numbers: $1MM in revenue, $200k in SDE, purchase price $600k.
In my review, I learned that the owner does all of his work — including work for a general contractor — without any formal agreements in place. Naturally, this is a bit concerning for me. The broker suggests that operating off of ‘handshake agreements’ is really common for contractors of this size. The seller has shared that he’d love to introduce me to all of his major clients and make sure we have a good handover — so I’m confident he’s not hiding anything. Just trying to get a feel for how concerned I should be.
Would love to hear any thoughts or experience you guys have to offer in this space. How concerned should I be about ‘handshake agreements’ with a electrical firm of this size?
“Handshake agreements” in small contractor firm — should I be concerned?
by a searcher from Rice University - Jesse H. Jones Graduate School of Business
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I would however strongly consider an earn out based on customer/revenue retention. If he's confident the customers will stay without a contract in place he should be OK with this.